Free Market Accountability

Dodd-Frank Is Obamacare Bad

How much of it will President Trump and the proposed Financial Choice Act undo?

Inside Job was one of the worst documentaries ever to win an Oscar.

The 2010 flick, in which Matt Damon narrates the supposed roots of the 2008 financial crash, is dumb. It’s not Fahrenheit 9/11 dumb, of course, but it’s basically the opposite of The Big Short, both book and movie versions. The latter explores the exact mechanisms underlying the financial crash of 2008. The former bores its audience by insisting for two hours that everything is the fault of “deregulation,” without ever citing regulations (at least not during the part I stayed awake for). Its fans, you figure, explain anything that happens in the Middle East with a simple, “It’s about the oil.”

Democrats tend to be keen on easy answers pulled from their own heads with little regard for the real world. Their response to the financial crisis was the same as our filmmakers’ — blame a bunch of rules that didn’t exist, and then make them exist.

We call the result Dodd-Frank. It’s so horrendous that us regular folk far from the beltway actually notice its effects in our own lives. It’s Obamacare bad, in other words.

I bought a house last summer (first one!), and the whole process went smoothly, except for those parts of the transaction touched by Dodd-Frank. Rules meant to “protect” me from predation nearly blew up the deal — twice. Could I afford a monthly payment less than the rent I’d been paying? Real headscratcher, but Congress has decided to answer for me. It has also ensured that appraisers do a quick-and-dirty job that is completely unresponsive to the needs of lenders and buyers, blowing up deal after deal. How hard is it to understand the basic truth that value is determined by what somebody is willing to pay for it?

Dodd-Frank is causing the exact problem it was meant to prevent, as it has tilted the field in favor of the institutions that are supposed to be too big to fail. Its weighty compliance costs are leading hundreds of small banks to close their doors or merge with larger institutions. Their edge has always been trust based on relationships, which Dodd-Frank overrides with formulas and requirements. One survey of community banks found that Dodd-Frank had driven up regulatory paperwork costs by 86 percent. Those costs mean little to the big guys, but in community banking, the cost of hiring another compliance officer or two is often the difference between a profit and a loss.

President Trump has promised “a very major haircut” to Dodd-Frank, but he’ll be getting a lesson shortly in just how hard it is to do anything very major in Washington. The Treasury Department has a Dodd-Frank report due any day now. The word from Politico is that’s mostly incrementalism and foot-dragging, aside from a few blows thrown at the racket known as the Consumer Finance Protection Bureau, which deserves many more still, preferably with some sort of spiked bat.

Dodd-Frank is, in the main, a law ordering bureaucrats to come up with hundreds of new rules on finance (seven years later, they’re still not done). So in theory, Trump has the authority to undo much of the regulation himself. The bureaucracy, however, is unlikely to go along with that, especially where its own prerogatives are concerned. This is the part where a president coming straight from the business world starts to realize just how unlike the presidency is to being a CEO. When you say jump, they say, sure, just as soon as the blue ribbon panel completes this study on the potential effects of not going high enough. On some of the most controversial aspects of Dodd-Frank, the Treasury report boldly calls for… more study.

Treasury does propose allowing small banks (with under $10 billion in assets) a little more room for growth before they’re subjected to the Volcker rule, which prohibits them from making all sorts of investments with their own money. That’s also the threshold for stress testing. Somehow, a rule meant to ensure that pillars of the system (viz. AIG, Lehman Brothers) don’t collapse is now deemed appropriate for the Banner Corp. of Walla Walla, Wash. How would we survive without those guys?

The report is most likely meant to frame the debate as the Senate takes up the issue. Last week, the House passed a far-reaching bill called the Financial Choice Act on a strict party-line vote. Sen. Elizabeth Warren (D-Mass.) calls it “a 589-page insult to working families.” Rep. Maxine Waters (D-Calif.) says “the bill is rotten to the core.” Mother Jones calls it “the most dangerous Wall Street deregulation bill ever.” So you already know it’s pretty great.

But its fate in the Senate is cloudy, as Democrats can filibuster the thing. On this issue, there’s no way Republicans will peel off eight Democrats to force a vote on something that undoes one of President Obama’s signature accomplishments. But the (don’t-call-it-a) bailout provision of Dodd-Frank, known orderly liquidation authority, reportedly could be stripped out through budget reconciliation, so the Republicans do have a card to play. There are worse parts of Dodd-Frank, though, so maybe they can trade it for something — like that spiked bat, maybe.